How News Ltd sunk its claws in league

10 March 2007 — 11:00am

A WAR has erupted between the NRL's equity partners, the ARL and News Ltd, over the time frame of the media giant's ultimate withdrawal from the game. It's a war fuelled by accusations of conflict of interest and the huge profits News Ltd makes from rugby league.

In a thinly veiled attack on ARL directors, including chairman Colin Love, Roosters chairman Nick Politis and QRL chairman John McDonald, a News Ltd spokesman yesterday referred to "dinosaurs" who "snipe from the sidelines and whisper behind the scenes instead of having the guts to put their views openly on the table".

This follows a recent NRL board meeting at which News Ltd appointee Peter Macourt accused the trio of leaking material to Fairfax newspapers, including the Herald.

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Although ARL directors refuse to comment, the antagonism makes a bitter backdrop to the gala season launch next week on the Gold Coast.

ARL and News Ltd directors on the NRL Partnership Committee have polar-opposite views of a News Ltd exit clause in the peace treaty that was signed when the Super League war ended on December 19, 1997. A News Ltd spokesman said in answer to a series of Herald questions: "News has no plans to exit the NRL. We are working to make rugby league as popular and prosperous as ever."

The ARL believes News Ltd is now effectively halfway along a 20-year time frame to surrender all power. According to NRL chief executive David Gallop: "The merger agreement provides that at the earlier of 20 years or the repayment of News' new investment in the NRL [funding to the competition after January 1, 1998], News will transfer its directorships to the current franchisees … then the agreement provides that 'at some time after the earlier of those dates' News will transfer its interest in the partnerships to the current franchisees."

Published accounts of "new investment" at the time of the peace treaty put the sum at $130 million and News Ltd has drawn $8m a year out of NRL profits most years, meaning the time frame for repayment will be approximately 20 years.

But if money paid by News Ltd to the North Queensland, Melbourne and Canberra clubs to keep them competitive is counted as "new investment", the 20-year withdrawal is expected to come sooner.

No finite term is attached to withdrawal from the partnership board in the clause "at some time after the earlier of those dates". ARL sources claim News Ltd is using this vagueness to remain in the NRL forever.

When the exit clause was put to Love, a lawyer, he said: "I was not involved in the negotiations at the time but I think any reasonable person would have to interpret the clause as meaning within a 'reasonable' time after the earlier of the two dates, otherwise the clause would be meaningless and/or illusory."

News Ltd's initial transfer of directorships is to the NRL board, a Clayton's board with News Ltd's representatives such as Gorden Tallis and Katie Page meeting five times a year to make operational decisions, such as rubber-stamping key-performance indicators for referees.

The NRL Partnership Board is where the power lies: it makes the key revenue decisions, such as accepting TV deals.

With News Ltd making massive profits from its pay TV joint-venture Fox Sports, which televises five NRL games a week, the "some time" when News Ltd surrenders its partnership directorships now appears to be an eternity.

Fox Sports, or Premier Media Group PL, the joint venture between the Packer-owned PBL and News Ltd, is expected to make a profit of $60m this financial year and much of this is on the back of NRL games, which provided 73 of the top 100 programs of all types on pay TV last year.

News Ltd has a first-and-last rights option over NRL rights for 25 years, further fuelling the suggestion it will use the confusion over its exit from the code as a bargaining tool to extend this option.

Furthermore, the $560.2m spent on the Super League war has now become a tax strategy, which was revealed when News Ltd shuffled its Australian companies for tax purposes after moving to the US, converting loans to shares.

While Packer and Murdoch are milking the cash cow that is the NRL, Telstra is providing most of the fodder. Fox Sports provides the NRL with $42m in pay TV rights but sells the games to Foxtel, which is half-owned by Telstra.

In 1998, when the NRL started, News Ltd was already making a motza from rugby league, with Fox Sports, a production company, selling programming to Foxtel for $62m a year, a sum greater than all the NRL's income. And the contract per subscriber was set in US dollars, another windfall, considering exchange-rate movements.

News Ltd lawyer Ian Philip and chief accountant Macourt are directors of Premier Media Group Pty Ltd and are also two of News Ltd's three directors on the NRL Partnership Committee. They are bidders for the broadcast rights via Fox Sports and biddees as half-owners of the NRL.

According to evidence in the C7 Federal Court case, Philip was chief organiser of the 2001 Fox Sports' bid, then encouraged the NRL to accept it. Yet, conflict-of-interest accusations are often dismissed at the top end of town as the invention of left-leaning lawyers and journalists.

News Ltd takes a more pragmatic view: blame its equity partners. After all, it is true nothing can be approved by the Partnership Board unless both sides agree and Politis is also an ARL representative on the Partnership Board, meaning he votes on matters affecting his club, such as movements in the salary cap.

"The potential for conflicts for both News and ARL representatives was explicitly anticipated when the current management structure was established," a News Ltd spokesman said. "As a result, all major decisions by the partnership committee require the unanimous support of all members of the committee. This applies equally to contracts between the NRL and Fox Sports."

While Foxtel and Fox Sports refuse to divulge details of their commercial transactions, hiding behind "commercial in confidence", figures obtained from ASIC for the year ended June 30, 2004, reflect the value of rugby league as a source of profits to News Ltd and PBL.

Premier Media Group's financial report shows revenue from services as $184.8m, rights fees as $82.4m and total production costs as $29.3m.

The 2004 NRL rights were about $34m a year and, with production costs of $12m ($100,000 a game), the cost of producing Fox Sports games was less than $50m a year.

Yet rugby league dominated the top 100 programs of all types on pay TV, indicating the NRL is a major source of the $184.8m PMG earned.

Fox Sports concedes the NRL now costs $60m a year and it is clearly a big factor in PMG's revenue jump of 24 per cent to an estimated $120m for the December half of last year.

Yet the potentially loss-making AFL pay TV deal was done with Foxtel, not Fox Sports, suggesting that when News Ltd wants to pay over the odds for sport, the contract is done with Foxtel, which is half-owned by Telstra. Macourt also sits on the Foxtel Board. A Foxtel spokeswoman conceded AFL was the only sporting property it held.

While the NRL supplied three-quarters of the top 100 programs on pay TV in 2006, last year the AFL had one game at 89th, lower than the movie "Star Wars 3: Revenge of the Sith", with just a couple more in the 90-to-100 bracket.

Although News Ltd owns only 25 per cent of Foxtel and 50 per cent of Fox Sports, it holds the management rights to both organisations. It hired Foxtel CEO Kim Williams and Fox Sports boss David Malone and also appointed the chief financial officers.

While Fox Sports has been a profitable business for some time, Foxtel made a pre-tax profit for only the first time in 2006, an EBITDA figure of $169m, after losses the previous two years of $15m and $78.5m.

The evidence suggests that when it comes to rugby league, Fox Sports buys low from a part-owned business (the NRL) and sells high to partners in a loss-making business (Foxtel).

However, with AFL, the loss-making business buys high and News Ltd is exposed to only 25 per cent of the possible debt, with Telstra funding half.

When Telstra learnt last month it also had to pay a fee to Fox Sports for vision supplied to hand-held phones - and the NRL had to contribute on the advice of News Ltd's Philip - it must have aggravated a relationship that is as brittle as the ARL-News Ltd joint venture.

Telstra is the financial cuckold of football, the Andrew Parker-Bowles of sport.

Incredibly, it is also the naming-rights sponsor of the NRL, renewing the relationship this week in a six-year $90m deal, described by Gallop as "the longest-serving naming-rights sponsorship in premiership history".

News Ltd's three NRL clubs

THE $8 million News Ltd draws annually from the NRL is returned to the code via its ownership of the Melbourne Storm.

The grand finalists made a loss of $6m last year and invested a further $2m in development of the game in Victoria.

However, News Ltd's other two clubs - Broncos and Cowboys - now make a profit.

The publicly listed Broncos, owned 67 per cent by News Ltd, made profits of $2.2m and $2.3m the past two years, with minimal support from their profitable licensed club.

Broncos chief executive Bruno Cullen says: "Over the past four years we've made a cumulative operating profit of $6m."

The Townsville-based Cowboys, a privately owned News Ltd company, made $200,000 last financial year after years of losses.

The club's chief executive, Peter Parr, says: "There has been a massive turnaround the past few years."

The three News Ltd-owned clubs are perhaps the best run of the NRL's 16 clubs.

They are leaders in social welfare programs and have all appeared in the past two grand finals.

News Ltd's original investment in them was not predatory and driven by the motive of ensuring they did not fall over in an era of stratospherically-high player salaries.

As part of the December 1997 peace deal with the ARL, News Ltd did commit to reducing its stake to one club, although no time frame was imposed on this.

In 2002, News Ltd surrendered ownership of the Raiders and indications are it will sell the Cowboys, leaving it with only the Storm and Broncos, last year's grand finalists.

But with News Corporation heir Lachlan Murdoch the No.1 cheer leader of the Broncos, it is certain the Brisbane club is the one NRL franchise News Ltd will never relinquish.

James Packer, however, puts nothing back into the game, despite sharing with News Ltd half the Fox Sports profits and is desperate the NRL do a deal with Betfair which he half owns.

The Packers also did well when News Ltd cut PBL into Fox Sports as part of the peace deal between the warring media companies at the end of the Super League war.

Packer bought in at cost price and now shares the massive profits of Fox Sports without commitments to NRL clubs.

Roy Masters

Q&A WITH NEWS LTD

Roy, Here are our answers to your questions and some additional comments.

Q. What is News Ltd's exit strategy from the NRL, in terms of the peace agreement of 1997-98, particularly the clause, "at some time after the earlier of those two dates"? What is the amount of "new investment"?

A. News has no plans to exit the NRL. We are working to make rugby league as popular and prosperous as possible.

Q. Does Macourt/Philip board positions on PMG conflict with board positions on the NRL, particularly with reference to Fox Sports/NRL contracts?

A. The potential for conflicts for both News and ARL representatives was explicitly anticipated when the current management structure was established.

As a result, all major decisions by the partnership committee require the unanimous support of all members of the committee. The views of one party cannot be forced on the other. This applies equally to contracts between the NRL and Fox Sports.

Additional Comments (on the record):Some "dinosaurs" who claim to be associated with the game seem nourished by the idea that News wrecked rugby league, and has a hidden agenda to destroy what's left. The logic of this escapes us; why would we want to erode the value of a sport in which we have invested hundreds of millions and to which we remain fully committed?

Those critics are like soldiers in the jungle who don't know the war is over. The Super League war ended over 10 years ago; it's time they got over it.

Our critics, who are easy to spot, all share peculiar traits. Obsessed with criticising News, they are unable to offer any constructive solutions to the problems they believe we create. They snipe from the sidelines and whisper behind the scenes instead of having the guts to put their views openly on the table or, frankly, the intelligence to have viable, alternative ideas.

They use journalists to run their agendas and it's no coincidence that we often learn of their concerns in The Sydney Morning Herald. You know who they are and so do we.

The recent criticism of News over the digital rights contracts is worth considering in some detail. Various league administrators and "experts" used the Herald to argue that:

1. The NRL doesn't have any money in the bank; and

2. The NRL is earning far less than it should be from pay TV, internet and mobile phone rights.

We would like the NRL to have some retained funds but we recognise that the NRL and ARL need to remain competitive in development funding.

The NRL reinvests its handsome surpluses in developing rugby league. If the NRL had a large bank balance our critics would be arguing it gets spent on game development.